The question “is Bulgaria ready for the Eurozone“ is asked every day in the media, and the experts defending the two opposing positions always seem to answer by inertia – with complicated explanations, worried looks and conflict with each other. But why are we even talking about “readiness“?
As if we perceive the process as some kind of exam that we have to pass, or as a battle with someone.
In fact, the Eurozone is not an obstacle that Bulgaria has to deal with, but quite the opposite – a prize that is guaranteed to us and it is high time we took it. And a prize worth 16 trillion euros.
By entering the eurozone, the country will reap three main benefits - stability of consumer prices, financial sustainability of business and society, and even closer ties with our strategic partners - and not a single new risk that currently faces us.
Contrary to the most common misconception about the euro, it will actually stabilize prices in our country, as it will bring Bulgarian consumers and businesses closer to the institution that creates new money - the European Central Bank (ECB). This is a function of a principle in economics, noticed by the Irish-French economist Cantillon and bearing his name - prices in an economy grow unevenly. The reason for this is that new money has one "entry point" in the economy, but is not distributed evenly among all market entities. This entry point is precisely the ECB and the fiscal policy of the major countries in the eurozone - that is, the closer a consumer, company, fund or bank is to the entry point, the sooner they will acquire assets, goods and services at the current lower prices, before they rise like a tsunami to the periphery.
In practice, the Cantillon effect is perfectly visible today in countries with inflationary problems in the European Union, such as Hungary (4.8% in March) and Romania (5.1% in March). They are outside the eurozone, trying to implement their own unconventional monetary and fiscal policies and are periodically hit by price waves coming from the center of Europe.
Bulgaria somewhat avoids this, but not in all sectors – televisions and social networks are flooded with pictures of food products, such as chocolate and butter, which are tens of percent more expensive in our country than in eurozone countries, such as France or Germany. Bulgarian business faces the same problem – being far from the entry point of money into the economy, it buys important production machines and raw materials at a later stage and, accordingly, at a higher price.
Bulgaria's entry into the eurozone will bring consumers and businesses closer to the entry point of money in Europe and this will calm and even lower prices, and will not raise them - confirmed both by a principle in the economy of 400 years ago and by reality today. By moving further inland towards the center of money supply creation, Bulgaria will neutralize once and for all the effect of redistribution of wealth in favor of the center and to the detriment of the periphery. The accumulated inflation in the euro countries since the creation of the currency is nearly 75%, while for the same period the inflation in Bulgaria, which is in a currency board and on the periphery of the single currency, is nearly 130%.
Secondly, the eurozone will provide an environment of financial stability, predictability and depth of capital for Bulgarian entrepreneurs. A currency is stable when it is backed by a large economy and numerous transactions. The dollar is the world's reserve currency not because of a secret agreement signed in some Alpine hotel, but because the share of the American economy even today is over 25% of the world's; American public companies have a capitalization of over 50% of that of all public companies in the world; and, logically, over 50% of all bank transactions are in dollars.
For Europe to compete with the American or Chinese economies, it must not only have approximately the same size, but also achieve a full monetary, financial, banking and capital union, so that the entire 16 trillion gross domestic product of the European Union can effectively stand behind the single currency. This will provide an opportunity for Bulgarian entrepreneurs to receive more and easier investments from both European and global investors; Bulgarian business will be financed with all the confidence of the world's second largest economy behind it and without having to struggle with a number of obstacles and problems with currency exchange and reputation (for example, our inclusion in the FATF money laundering gray list).
Another important benefit and strength of the single currency is that it abolishes the so-called currency nationalism. Before the advent of the euro, there was a tendency for competitive devaluation in Europe. In other words, central banks devalued their national currencies in order to gain a (short-term) competitive advantage based on cheap exports. The negative impact, however, falls on both the purchasing power of citizens and on businesses that want to develop through innovation and science, since the cheap currency cannot attract highly qualified specialists, innovators, scientists and risky entrepreneurs.
Therefore, after our entry into the eurozone, Bulgarian business will receive a guarantee worth 16 trillion dollars. This will attract investments in start-ups and developed companies, reduce financing costs and synchronize the risk premium with the European one.
Thirdly, the eurozone will bind Bulgaria to its most important strategic partners, which are not the result of political choices, but of numbers - Bulgaria's trade exchange with EU countries is over 2.5 times greater than its exchange with third countries. These are not just economies, through whose trade and investment exchange Bulgaria has tripled its share of the average income in the European Union in two decades, but also countries with which we have a well-harmonized regulatory framework, capital and banking systems and, last but not least - a culture of doing business. Any reorientation of Bulgaria towards another strategic partner will take decades to build such ties, before we even think about any competing (if that is possible) benefits.
That is, entering the eurozone will be the final stage of binding Bulgarian business to its strategic and largest partners and investors, with whom we share a culture and common laws, with a perspective for decades to come. This will also be a kind of shield over Bulgaria against malicious economic moves by third countries that would have a political interest in destabilizing our economy as part of the European one.
But let's also say a few words about the most insistent arguments against adopting the euro, which only cause bewilderment among businesses.
The convergence of the average GDP per capita between Bulgaria and other European countries is not a requirement for overcoming any obstacle in order for the single currency to function effectively. The dollar, for example, works perfectly in Vermont with a GDP per capita of $60,000, as well as in California with $100,000; the yen works perfectly in Nara Prefecture with a GDP of 2,700,000 yen, as well as in Tokyo with 7,700,000 yen; the British pound works perfectly in the London region with a GDP of 180,000 pounds, as well as in the southern region of Scotland with a GDP of 19,000 pounds.
The sovereignty of the Bulgarian lev is no guarantee of effective policies, especially for a relatively small economy like Bulgaria. For 1,300 years of the state's existence, the Bulgarian lev has been independent of world currencies and actively managed for several short periods with a total duration of less than 50 years - and they always ended with inflationary, banking or other financial crises. And this should not embarrass us, but is simply proof that currency unions are very beneficial for countries with relatively small economies, due to the guarantee that a huge common economy gives to the currency and the banking system.
Comparisons with Sweden, the Czech Republic and especially Denmark are particularly misleading, because unlike us, these countries have stated from day one that they are moving slowly through this process and are not taking consistent steps to enter the eurozone. Bulgaria has been doing exactly the opposite – for 10 years it has been declaring readiness, binding European institutions with steps, analyses and reforms (ERM-2, Banking Union, etc.) that cost not only time but also money, and declaring a political desire to adopt the euro. And to give up in the end means to go back on our own word and to “cheat” the resources invested in these steps by our European partners – exactly the opposite behavior of the aforementioned 3 countries.
Finally - in the eurozone, there may be a debt or financial crisis, which Bulgaria, with or without a currency board, will easily avoid. There is no obstacle, with unreasonable management, for Bulgaria to repeal the currency board law and once again accumulate debts, enter hyperinflation, collapse its banks and not be able to count on help from anywhere. Nor is there any instrument that would isolate us from the effects of the eurozone's monetary policy while we are in a currency board. Yes, there may be crises in the eurozone, but each of them is even more likely to materialize outside the eurozone. And almost all possible crises for us outside the eurozone are less likely or completely impossible while we are in the currency union.
The Bulgarian Employers' Association (KBIA) as the largest Bulgarian employers' association does not view the eurozone as a problem or obstacle for which we must “prepare”. Bulgaria has met all the criteria for adopting the single currency and it is a matter of political, not economic, decisions. Joining the eurozone will be a reward and a tool with which we will reap all the benefits of our membership in the European Union and minimize all the risks we face outside it.
Let's do it.
Boyan Nikolaev is Deputy Executive Director of the KBIA. He graduated in business administration from the City University of Seattle and holds a PhD in public communications from the New Bulgarian University. He teaches at the Department of National and Regional Security of the UNWE and the Department of Media and Communications of the NBU. He is an advisor to the President of the Irish-American University in Dublin.
Source: economic.bg